I just got back from the Skoll World Forum in Oxford and it’s clear that impact investing is playing an ever-larger role in the world of social entrepreneurs. That is a good thing, but here’s a critical question for the would-be impact investor: Are you a private equity investor in emerging markets? Or are you focused on solving an important social problem at the base of the pyramid?

Much of the trouble with impact investing has been the result of fuzzy thinking about those two roles. They are not mutually exclusive, but how you make decisions, deploy capital, and support organizations is likely to be much different depending on which approach is primary.

At Mulago, we are focused on solving problems for the extreme poor. Our work became more interesting as the idea of impact investing invaded philanthropy and private equity. To make sense of the investment opportunities that clog our inboxes, we have had to think hard about financial sustainability, the role of capital in scaling ideas, and the needs of our portfolio organizations.

To find clarity we return to our mission, which is to make the very poor a lot better off. We don’t care whether an organization is a for-profit or non-profit. What we want to know is whether it will have a big impact on our target population.

When we look at the world of impact investing through this lens, we find remarkably few for-profit ventures that both reach our target population and have the potential to become viable business enterprises. Cash flow projections are wildly unrealistic, management teams untested, and market failures unacknowledged. There’s 10 times the risk profile of a standard US venture deal without the same potential upside.

All of this does not mean that market financing is not playing a big role in creating social impact. In emerging markets like India, Mexico—even Ghana—global investors (without the impact label) are driving big gains in livelihoods, healthcare, education, and access to energy. If impact investing is merely laying a social screen on money that is already targeted for investment, more power to all.

But there’s an elephant in this room.

Impact investing, and its seductive message of doing good and making money, is having a profound impact on philanthropy. The role and impact of grants is being questioned. Social enterprises with revenue models are having unrealistic economic expectations imposed on them. But most of all, impact investing creates the illusion that traditional business models can solve big problems in places where poor governance and huge market failures are the rule. In our experience, this is simply not the case. If you invest through the impact lens, the right capital structure needs to be applied to the right organization at the right time.

Three well known social enterprises—Bridge International Academies (BIA), Embrace, and One Acre Fund (which, full disclosure, are part of the Mulago portfolio)—illustrate the variations on this theme.

Jay Kimmelman, the founder of BIA, has a big idea: delivering a quality education to very poor kids in the slums of Africa at a potential scale that is breathtaking. The only way to achieve his mission, however, is to invest heavily—from the very outset—in very sophisticated systems and experienced management, because these are what drive the economics of the business. And the only way to raise the capital he needs to do this is through private equity investors. There really is no middle ground. When Jay got started, either he was going to build a big business quickly or he wasn’t going to build one at all. Jay took the gamble and, largely based on his previous success as an entrepreneur, was ultimately able to bring investors along.

Embrace, the product innovation company behind the Embrace infant warmer, started as a nonprofit, only to emerge four years later, as a for-profit company that will have an ongoing royalty relationship to the startup nonprofit. In 2008, moving their first product through R&D and clinical trials was simply not a good fit for debt or equity funding. There were too many unknowns and a relatively inexperienced management team, both of which would have limited their ability to attract investors. But now that they have a viable product, along with a more mature management team, debt and equity are the right forms of capital to fuel manufacturing, distribution, and future product development. Early stage, exclusive grant capital allowed the company to get past R&D and make private financing a realistic option.

Ironically, many social enterprises with rapidly growing earned revenues are actually organized as nonprofits. One Acre Fund, for example, generated $5 million in earned revenue last year (and is on track to generate $12 million this year), yet has no intention of morphing into a for-profit enterprise. Why? Because the leadership knows, based on iterations of field trials, that serving a market of rural, smallholder farmers requires long-term subsidies for agricultural extension, new market development, and product/service innovation. In this case, impact investors (i.e. donors) are not getting their money back, but their funds are highly leveraged and being used to solve very real problems that plague subsistence farmers all over Africa.

Nobody wants to be dependent on donor subsidies. Relative to private investment capital, the dollars available are tiny and the process to secure them is ridden with inefficiencies. But if the objective is social impact at the true bottom of the pyramid, then entrepreneurs need to think hard about the kind of capital they need, given the mission, stage, and scale of their enterprise. At the same time, impact investors—especially those who consider investing an alternative to grant making—need to step back and think about exactly what problem they want to solve and how best to deploy capital to do it.

Laura Hattendorf joined the Mulago Foundation in 2007, having survived start-ups in both the for-profit and non-profit sectors. As the Portfolio Director, she is responsible for developing Mulago’s investment framework and building a portfolio of exemplary social investments.